IMF, World Bank push fiscal perks bill

THE International Monetary Fund (IMF) and the World Bank prodded the Philippines to reform its fiscal incentive system amid a redundancy that has rendered tax administration inefficient in raising revenues.

In a forum, Dennis Botman, IMF resident representative, said the government should bat for the streamlining of the institutional framework, enhancement of public disclosure, narrowing the scope of incentives, and abolition of tax holidays in favor of better-targeted incentives.

This is because “tax incentives are not the most important to investors,” he said.

Citing a survey of foreign investment decisions of Fortune 500 companies, Botman said that non-tax factors were the main determinants of their location decisions, and not the tax incentives that a country could offer to investors.

Such non-tax factors include good transportation system, good governance and enforcement of property rights, a skilled labor force, low power costs, and a supportive regulatory environment.

“To improve the score on some of these factors, it is essential to raise government revenue. At the moment, incentives provide money to something that is less important to foreign investors, at the expense of factors that are more critical to their investment decisions,” Botman said.

The IMF official also scored the grant of incentives to mass housing projects. “Income tax holiday for developers of housing projects of low income earners does not necessarily promote housing for low income earners. Rather this would unduly benefit developers at the expense of other taxpayers and be prone to abuse,” he said.

Although tax incentives carry some disadvantages, “tax holidays are particularly damaging as profits are exempted regardless of their amount,” he said, adding that “the most profitable investments, which would have taken place in any event, benefit the most.”

He said that estimates for the Philippines indicate that the revenue loss from redundant incentives could be as large as one percent of gross domestic product (GDP), providing a windfall gain to receiving firms.

Instead of giving enormous incentives, Botman said these revenue resources could be used to scale up public investment, which is low by regional standards at around 3.5 percent of GDP.

GDP is the amount of final goods and services produced within the country.

The IMF official said that tax holidays invite tax avoidance through the indefinite extension of holidays via creative re-designation of existing investment as new or by encouraging transfer pricing or other devices to shift earnings to holiday companies.”This is especially true for countries with weak revenue administration,” he said, adding that “leakage from special economic zones is another concern.”

Botman said the number of incentive-giving agencies in the country should be reduced as they complicate the system and often end up competing against each other.

“There are currently about ten investment promotions agencies and several national government agencies involved in managing investment activities and administering tax incentives. This framework governing the granting and oversight of tax incentives should be streamlined,” he said.

Incentives should be well targeted to a limited number of firms, and provided only to attract firm specific and not location-specific, internationally, mobile capital, the IMF official said.

“This would clearly not include investments in mining or property development, as some have been lobbying for,” he said.

Eric Le Borgne, senior economist at the World Bank in Manila, agreed with Botman, saying the government should enhance the transparency of the budget document, including all foregone revenues and make explicit the agencies that grant them.

Le Borgne raised the need to internalize the costs of tax expenditures as agencies granting tax exemptions see them as part of their budget.

Better information should also be available for improved analysis on the fiscal costs, economic impact and benefit incidence of fiscal incentives.

“The country’s data on fiscal incentives, and more generally on tax expenditures, are not regularly and systematically collected,” he said.

The World Bank representative pushed for the inclusion in Fiscal Responsibility Bill the requirement to identify alternative revenue measures and/or expenditure reductions when new tax incentives are approved and identify the Department of Finance as agency in charge of estimating the cost of the proposed tax incentives. –Katrina Mennen A. Valdez, Reporter, Manila Times